After the presidential election season, characterised by divergent COVID-19 policy, growing racial turbulence, and a struggling economy, Joe Biden has secured the presidency, removing Donald Trump from office. This result is likely to affect both short- and long-term investment strategy in the Commercial Real Estate (CRE) division, which covers office space, industrial real estate, multi-family rentals and retail properties. Different sectors and locations are likely to have opposing outlooks following the Democratic victory.
There is a considerable divergence in thought over the impacts of an incoming Biden administration. On the one hand, one of Biden’s principle tenets centres around helping many Americans from low- to middle-income backgrounds become homeowners, with a 640 billion USD investment stratagem. Through the plan, first-time buyers are to be offered a 15,000 USD tax credit and federal payment assistance, with the aim of allowing buyers to put a larger deposit towards their new purchases. This proposition is likely to further fuel the historic housing shortage that the US currently faces, fomented by low mortgage rates, that are responsible for pushing median house prices to 350,000 USD.
Whilst this progressive strategy is widely accepted by American citizens, the President-elect’s proposed tax policy is causing concerns within the CRE sector. Proposals such as a reduction to wealthy investors’ ability to reduce their tax burdens using real estate losses, or even bringing an end to 1031 exchanges, are not popular within the sector. These policies have been proposed as a method of funding Biden’s 775 billion USD scheme to provide universal pre-schooling and improved care for senior citizens.
A common theory is that demand for Commercial Real Units is often stronger under Republican administrations given their more conservative, pro-business policies. However, statistics illustrate that returns under presidents of each party do not identify a significant dichotomy in CRE welfare. Over the past 40 years, annualised total returns averaged 9% under Democratic regimes versus 8.2% under the Republicans, according to the Newmark Group. Figure 1 highlights the steadiness of returns, with CRE deemed to be far more disturbed by varying economic fundamentals, such as increasing interest rates or animal spirits, than the new president elect. Moreover, the effects on CRE will be far stronger if both the White House and Congress are of the same party. Indeed when executive and legislative branches align, economic expansion packages can be passed quickly, inducing demand for retail and commercial industry space as economic growth occurs quickly. While there may be some correlation between the political party in control of the White House and Congress with greater office absorption, correlation is not causation; aforementioned economic and geopolitical factors will have a greater impact.
Figure 1: Graph showing Real Estate returns by presidential party, annualised total returns for all asset types (US 1981-2020). NCREIF, NKF Research
That said, CRE executives do generally agree that Biden is likely to engender greater stability within the market. By contrast, President Trump was responsible for considerable domestic and foreign volatility, with his largely mercantilist rhetoric reducing the appeal of US assets to global capital investors. Research from Real Capital Analytics shows 100 billion USD of net acquisitions from foreign buyers in the 2015 to 2016 period, whilst international groups were instead net sellers by 2019, with net acquisitions around 60 billion USD. Biden’s more predictable demeanour and governance should allow for greater forward-planning for CRE investors. The centralist governing that is likely to occur following a Republican Senate and Democratic White House should induce favourable economic conditions, and positive macroeconomic conditions have become synonymous with a bolstering real estate sector, notably as economic spare capacity is utilised with offices and industrial centres receiving greater demand.
A veritable deluge of questions is likely to be answered over the coming months. Biden will need the support of the Senate in order to institute tax changes and the impacts upon private real estate are highly dependent upon the size of Biden’s stimulus relief package and the success of the COVID-19 vaccine. The current political split in office is likely to bring about the appropriate economic conditions for balanced asset growth into Q1 2021. Therefore, whilst there is a ‘lag effect’ associated with policy intervention that can diminish any direct relationship between fundamentals, policy decisions can be hugely influential in inducing ‘business spirits’ and favourable market conditions immediately, which can then translate into ideal opportunities for investors.
By Tristan May
Sector Head: Theo Thomas